Multi Asset

Our long-term return expectations for capital markets serve as key inputs into our strategic asset allocation process for multi-asset portfolios and provide context for shorter-term forecasting.

The repercussions of US midterm elections will be felt over the coming months and years, not days. The key is how the results are transmitted to the economy, chiefly through monetary and fiscal policy.  

US markets have not taken kindly to the Fed’s renewed course of monetary tightening, but the effects of the Fed’s actions are stretching far beyond US shores.

Stocks and bonds have pulled back since the Fed clarified its commitment to fighting inflation. Despite volatility, we believe equities will stay within a broad trading range and not retest earlier lows. Rising yields, particularly among spread assets, should make bonds appealing compared to equities.

Risks are rising: the Fed must thread a narrowing needle-eye to stop inflation without causing a recession. We’ve lightened equity positioning and reduced risk within fixed income segments of portfolios.

As investors face heightened inflation risk and other uncertainties, look beyond traditional investment buckets to capture alternative sources of returns.

Fear of inflation, which has driven stocks and bonds down in tandem year to date, is expanding to fear of a growth slowdown, potentially leading to a capitulation point. If this shift takes hold, and stagflation risk has been priced in to reach a new equilibrium, it could restore the normal relationship between stocks and bonds.

Despite our view that a U.S. economic contraction is avoidable in the near term, the outlook for equities has deteriorated since the beginning of the year and we think this sour spot is likely to last as monetary policy becomes tighter.

Russia’s energy tentacles, intertwined throughout Europe’s power network, may prove difficult to excise.

Should the Russia-Ukraine conflict persist, it would lead to further tightening of financial conditions but is unlikely to deter the Federal Reserve from a 25 basis point interest rate hike in March. Tighter conditions will slow economic growth at the margins and constrain financial markets over the short term, but not over the longer term.